Ceylon Chamber Proposes Stimulus To Prop Up Demand

2014-10-28 04:16:08

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While commending the government for presenting a budget focusing further fiscal consolidation—specially for proposing to cut the fiscal deficit to 4.6 percent of the gross domestic product (GDP)— Sri Lanka’s premier trade chamber, the Ceylon Chamber of Commerce (CCC) proposed a “degree of fiscal stimulus” to prop up slowing demand seen in the market recently.“Whilst there is a proposed 15 percent increase in government expenditure, given the slack in demand in t he market recently, a degree of fiscal stimulus can be accommodated without substantial over-heating of the economy,” the CCC said in a statement.

“However, the chamber encourages the authorities to act quickly and decisively if there are signs of significant deviation from the government’s commendable targets for inflation and the current account of the balance of payments,” it added.Despite the policy interest rates remaining at all-time lows, the private credit growth in the country remains extremely sluggish, indicating slower economic activity. The Central Bank recently resorted to drastic monetary actions to encourage banks to lend the excess liquidity in their systems.

The budget 2015, which is largely considered an inclusive budget, proposed to give away more to people in terms of salary hikes, cuts in their water bill and the President made a request to the retailers to cut down the prices of essential goods at least by 10 percent. Probably the thinking behind the CCC’s call for a “degree of fiscal stimulus” would have been based on these factors, as the trade chamber may have thought that there was room for little bit of fiscal stimulus, given the additional liquidity that will come into the system.

Meanwhile, t he CCC welcomed t he gradual shift in the nature of tax incentives away from blanket, long-term tax holidays towards alternatives that are more targeted such as accelerated depreciation, tax holidays with defined time horizons and tax concessions that are directly linked to the amount and type of new investments undertaken.The trade chamber hails the new initiatives to better link revenue and other state agencies and stronger integration of ICT in revenue collection. It also welcomed the proposal to have a one-stop-shop service centre at Sri Lanka Customs.

“These measures will improve the ease of doing business in Sri Lanka, which is often more important than granting tax concessions.”However, the CCC noted that since the two-thirds of the proposed new revenue for 2015 has been estimated to come from the refinance facility from collection of tax arrears, given the proposed changes in VAT, NBT and PAYE taxes, meeting the proposed revenue targets may remain a challenge.While acknowledging the positive measures already undertaken to promote exports, the CCC urged the need for a concerted effort at improving Sri Lanka’s export competitiveness to realize the full potential.“In this connection, we cannot overstate the importance of encouraging export-oriented foreign direct investment (FDI) into Sri Lanka.”

The CCC welcomed the reduction of electricity tariff but stressed the need for a transparent and market-reflective energy pricing mechanism, i nstead of ad-hoc adjustments.“We also recommend that attention is placed on addressing the quality of electricity supply, particularly issues of power brownouts and fluctuations and efficiently meeting the emerging needs of industries.”The chamber also welcomed the proposals to invest a further Rs.15 billion in school laboratories, introduce a scheme of schoolbased teacher recruitment, expand skill development and vocational training and to establish new faculties and degree programmes in science, technology, management and multi-disciplinary studies across several universities in the country.

Measures for further public investment in irrigation and reservoir development contained in the budget were welcomed, particularly in light of difficulties faced by communities across Sri Lanka during the recent drought “Additionally, the proposal to improve the availability of water in areas affected by the kidney disease ‘CKDu’ will contribute to the longer-term health and well-being of these communities, which in turn strengthens their economic potential.”Given the changing demography of Sri Lanka’s population and t he associated challenges in expanding social safety nets, the chamber said it recognised the need for introducing pension schemes as envisaged in recent budgets including the budget 2015.

However, the chamber cautioned against pension systems that are non-contributory and that are occupation-specific, as they could lead to fragmented schemes that experience difficulty in making steady payments and are expensive and unwieldy to administer.“A pension scheme that is professionally managed and sufficiently robust to meet the financial obligations of an ageing population is desired.”Meanwhile, t he CCC cautioned t he authorities in implementing the proposed 12 percent guaranteed interest rate to senior citizens, while recognizing the hardships faced by them in a low interest regime.

“we urge the authorities to exercise caution in implementing the proposal for offering a 12 percent interest on deposits in state banks, to avoid creating distortions that could have a negative impact on the financial sector. Moving forward, the financial needs of senior citizens should be addressed through the development of pension products.”

While substantial new financial allocations have been made for various government institutions and development programmes, the chamber emphasized the need to accompany them with reform of the operating structures of the institutions utilizing these funds so that the envisaged outcomes can be better realized Overall, while acknowledging that any budget must be seen in a policy continuum and is one in a series of ongoing measures to reach national economic goals, the chamber observed that the proposals contained in the budget 2015 must be complemented with measures that help achieve the economic transformation envisaged by the government in its ‘Vision 2020’ and ‘Five Hubs’ strategies.

“To achieve this transformation it is also important to avoid the current over-emphasis on subsidies and welfare transfers that have the unintended consequence of keeping people in low productivity and low incomegenerating economic activities.”Finally, the chamber proposed the initiation of work towards an accrual-based accounting system for government finances, with a view to full implementation by the year 2020, in line with best practices adopted by other middle-income countries.